Regulator aims to prevent carbon trading fraud

Carbon trading experts say there is potential for fraud in the global market, but checks and balances are improving.

Under the government's carbon pricing plan announced on Sunday, more than half of the emissions abatement to 2020 will come from companies buying it from overseas, at an estimated cost of $3 billion, with the remainder coming from Australian carbon farming and other initiatives.

A new body called the Clean Energy Regulator (CER) will determine companies' carbon price liabilities and operate the national register of emissions units, and work alongside the Climate Change Authority headed by former Reserve Bank chief Bernie Fraser.

Already more than 30 Australian-based brokers and companies, such as the Commonwealth Bank and Origin Energy Electricity, are registered with the CER. But the fledgling global carbon trade has seen its share of fraud and corruption, with such problems as companies buying into non-existent forests or renewable energy projects that don't get off the ground.

The Australian Federal Police also will have a role in investigating allegations of fraud or corruption.

GreenCollar Group chief James Schultz, who advises companies on carbon trading, said much had been learned in the past decade.

"Rigour is important," he said. "One of the lessons is the need for the market to understand what they are buying.

"It takes a while to be sophisticated about what is a shonky product - like a tree plantation that doesn't exist - versus something that has been rigorously audited."

While the details of the Australian system were yet to be fully spelled out, he expected it would be consistent with "international norms".

"Audit is an essential part of the process. You need a national standard, which at the moment is the Kyoto protocol," Schultz says.

"The carbon farming initiative is another standard. Auditors say: 'Have you adhered to the standard, have you told us the truth?' And if all those things stack up then you now have a climate change benefit."

Nationals senator Barnaby Joyce, who opposes the system, says despite $382 million being spent on a new climate change bureaucracy there were bound to be rorts as $3 billion went overseas on abatement.

"(It's) like those dodgy emails you get from the West African coast, only your government will actually start replying to them with your nation's bank account details.”

Taxpayers' money would be "cast like confetti around the world", he said.

But Treasurer Wayne Swan says Australian governance arrangements will be effective. "We're setting up a whole series of arrangements in our Climate Change Authority to make sure that governance is first class and world class.’

Opposition Leader Tony Abbott earlier this month told an industry forum that a "dependable carbon cop" would be needed if the scheme was to have any credibility.

The AFP has been examining the issue since an ETS was first raised as a serious proposal four years ago.

Former AFP chief Mick Keelty told a forum at that time that any carbon trading scheme had the potential to be undermined by "corruption or fraud".

In April 2010, AFP deputy commissioner for national security, Peter Drennan, said carbon trading "may in time provide opportunities for organised criminal syndicates to exploit new markets and engage in fraudulent activity".

An AFP spokesman said this week the final design of the scheme's governance was still being developed by the climate change department.

"The AFP has commonwealth responsibilities in relation to the investigation of serious fraud in government programs and in addressing organised crime," the spokesman said.

"It is too early to speculate on any potential criminal risks or the size and impact of any obligations for the AFP.

"However, the AFP will work closely with the relevant agencies ... to address identified risks, enhance the scheme's overall integrity, and manage any law enforcement resourcing impacts."

GreenCollar chief Schultz said carbon trading was becoming like buying any other commodity, but some companies will find that investing in Australian-based abatement projects, such as forests and farms that cut their use of fertilisers, is better than looking overseas.

"Some product is cheaper than others and some has a higher or lower risk profile than others.

"There is significant upside for companies that are able to invest directly into the primary market - companies that create credit, create the project itself as opposed to buying on the secondary market, which is cheaper but has a higher risk."

Schultz said the public could trust the auditing system as "these are the same people who tell you ships won't sink and planes won't fall out of the sky".

"The same level of audit is brought to this, and in fact it is more rigorous.”

The public concern was driven largely because in many cases "you are trading something that didn't happen", Schultz says.

"Most of what you are trading is an avoided emission. You are trading something that didn't happen, like stopping deforestation. It's not planting trees but has a great impact.

"By not chopping down a forest that is however many millions of tonnes of carbon dioxide that goes into the atmosphere and that compensates another activity."